Loan modification offer - too good to be true?

lindy7_2010June 18, 2010

Long-time lurker here with a question for the smart folks on this forum.

I have lots of equity in my house, am considering selling with the next couple of years, but would prefer to keep the house. I am comfortable with my current interest-only loan. The median price of houses sold in my town in May is around $1.4 million - it's a very strong real estate market and has not been affected by the subprime and Alt-A disasters, although it has been affected by the jumbo mortgage loan freeze-up. I'm aware that the numbers I'm throwing around are way out of whack with most of the country, but please bear with me :-)

In the past couple of months I've received 2 offers from my current lender to modify my loan. My current loan is a 5/1 interest-only ARM scheduled to reset on 1/2012. Principal is a little over $1 million, interest rate is 5.5%, current interest-only payment is $5000/month. The index is the 1-year LIBOR, with the new interest rate (in 2012) to be LIBOR + 2.25%, not to exceed an increase of 2% each year (so the maximum possible interest rate in 2012 would be 7.5%). The LIBOR is currently around 1.2%, so if the loan were reset today the rate would be 3.45%.

The first offer was to convert from the current 5/1 interest-only ARM to a 27-year fixed at 6%, which increased my monthly payments to $6600 or so (if I remember correctly). I declined.

The offer I received today is to convert to a new 5/1 interest-only ARM at 4.375%, which gives me monthly payments of $3981 (their calculation). The reset date would be 7/1/2015, rate to be based on LIBOR + 2.25%. So basically this would push out my reset date and save me $1,000 in interest per month.

From the document I understand that on 7/1/2015 the loan converts to a fully-amortizing loan at LIBOR + 2.25%, to be adjusted every year with the adjustment not to exceed +/- 2%.

What I don't see anywhere in this document is the length of the term. It just says "the date of borrower's first payment consisting of both principal and interest shall be that date provided for in the Note and Security Instrument and is not being modified herein". Right now, under the terms of my current loan, I'd begin paying principal and interest on 1/2012.

Does this mean I'd pay principal and interest at the teaser rate of 4.375% on 1/2012, rather than having a "true" 5-year interest-only loan? The fully-amortized payment would be about $6000/month at 4.375% for a 25-year term.

To call this a 5/1 ARM is confusing, if it becomes fully amortizing after only 18 months. Even so, I'd be saving $1000/month in those 18 months, so it seems like it's worth doing. I either pay LIBOR + 2.25% on 1/2012 or 4.375% on 1/2012, so I guess the opportunity cost is that if the LIBOR stays low for the next 18 months, I'd be paying a higher rate (4.375%) than I otherwise would (3.45% or so).

What am I missing here, and is this an offer that would be worth considering?


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I can't possibly begin to really sort out all your figures, but I strongly suggest you talk to the lender and ask your Q's there about term length, what you'd be paying for, etc. etc. This is not the place to get the important answers to your expensive questions. I would not try to figure it out all on my own, but I also don't think your old friend, bro-in-law or an internet forum are the way to go either.

    Bookmark   June 18, 2010 at 11:14PM
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Oh absolutely, I'll call the lender first thing on Monday.

I just thought that someone else might have been facing a similar choice or had done calculations on whether or not to refinance with these kinds of options. I know there are people who post here who are smart financially and who might be able to help me with this evaluation, or at least point out questions to ask the lender that I haven't considered.

    Bookmark   June 19, 2010 at 12:05AM
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Are these refinancing offers or loan modification offers? It sounds to me as if they are offering to refinance, which usually involves quite a bit of money in fees.

    Bookmark   June 19, 2010 at 11:04AM
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The 2-page agreement is titled "Loan Modification Agreement" and the cost is a non-refundable $325. The enclosed letter describes it as a modification, and says it's not a refinance. This is from my current mortgage company.

I don't really get what's in it for them, since I've never been late with a payment and am in no danger of default. Why are they lowering my interest rate during the interest-only period, and extending that period, but changing no other terms?

    Bookmark   June 19, 2010 at 12:20PM
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It may be marketing, the lender knows you will be shopping your loan with it resets.
4.375 for jumbo sounds amazing, check it out. Carefully read the reset.
I'd worry about costs, check it out carefully.
It may work for you. I'm in jumbo land also. You can't buy a house at conforming.

    Bookmark   June 19, 2010 at 3:52PM
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The conforming limits have been raised significantly as part of the 'stimulus package.'

In some markets it is approaching $730,000.

    Bookmark   June 20, 2010 at 11:03AM
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I live in California where the conforming limit is $729,750.

I called the mortgage company and verified one thing, which is that this offer doesn't restart the clock on the 5-year interest-only period. Instead it lowers the rate from 5.5% to 4.375% during the remainder of the interest-only period, and then fixes it for the final 3 1/2 years at 4.375%, at which point it will reset to LIBOR + 2.25%. So the potential is that I'd be paying more than I would otherwise once the loan payments are fully-amortized in 1.5 years.

The mortgage company realized that there were some details missing from these letter which is why it was confusing and they were getting lots of calls. I'm guessing it was a mail merge problem. A new one is being sent out today, so I should have the full letter in a couple of days.

    Bookmark   June 21, 2010 at 2:18PM
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Try ING - they are advertising a 3.75 rate on a 5/1 arm. I had them for several years on 2 houses. When I first got a loan with them the rate was 3.99 for the first 5 years (this was in 2003 I think). It reset to 3.00 after 5 years. We sold it in March. I don't think the rate would have risen again at the anniversary in Aug. It was a great deal and they have the lowest closing costs I have ever seen. Everything is done on-line and they send someone to your house to sign the docs. Never had any issues with them so I used them again when I bought a second home. Same good deals and low closing costs. Sold that home also in March. Paid cash for current home or I would have used them again!

    Bookmark   June 22, 2010 at 5:15PM
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Looks like the rate for a $500,000+ mortgage is 4.25%, still lower then what I'm being offered. Thanks for the tip, I'll look into it.

    Bookmark   June 22, 2010 at 9:54PM
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I had a long conversation with my original mortgage broker and he basically said this was a great deal, especially if I'm only going to keep the house another year or two. He feels the LIBOR is going to increase dramatically as soon as the economy strengthens. He said historically the LIBOR moved much faster than the other mortgage indexes, and he felt it had the potential to be much higher by the time my current mortgage was due to reset in 2012. So it seemed better to lock in the 4.357% fixed rate for 5 years rather than risk a higher rate when the loan converted to fully-amortized.

In the meantime I'll save $1000/month in interest payments, so this is a good thing as well.

I still don't know what my mortgage bank's incentive for doing this is, but at this point I guess it doesn't matter, I'm going for it :-)

    Bookmark   June 25, 2010 at 7:59PM
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